Shift in states impacts taxes

December 21, 2005

This is a question about the deduction for sales tax or state income tax. In July, I moved to Indiana, which has a state income tax, from Tennessee, which does not, so I actually have only been paying state income tax for half the year. When I figure my 2005 taxes, would it be reasonable to take a deduction for the income tax I paid to Indiana in that six month period, and add a half year's sales tax for the time I lived in Tennessee?B.H., Granger Yes, B.H., it would be very reasonable. It would also be very wrong! The rules say you can deduct whichever is more -- your state and local income taxes paid during the year or your total state sales tax paid (using the official IRS tables which take into account your state, total income and family size), but you can't combine the two types of taxes as you suggest. And you can prorate the amount in the tables based on the relative time spent in each state. So for this year, you might take half of the year's Tennessee Ken Milani and Claude Renshaw Tax Talk sales tax, and add half the year's Indiana sales tax, and compare that with the amount of state and local income tax paid since you've been in Indiana. By the way, vehicle purchases are not included in the state sales tax tables, so if you purchased a vehicle during the year, you can add the sales tax you paid to the amount in the IRS tables to compute the total amount of sales tax you paid during the year. Hope this helps, B.H., and welcome to Indiana! No need to rush to spendIt's almost the end of the year, and I still have several hundred dollars left in my Medical Spending Plan at work. Are there any restrictions about what I can buy and still get reimbursement?D.C., Niles We're happy to tell you, D.C., there's good news and there's good news. First of all, the definition of medical expenses qualifying for reimbursement is very broad. It includes the obvious things like insurance co-pays, prescription drugs and any medical expenses not covered by insurance. It also includes virtually any over-the-counter medications and remedies you can find in your local drug store -- aspirin, pain pills, headache relievers (probably you used these when you were recuperating from celebrating the White Sox' World Series victory!) cough and cold medicines, heartburn medication, and just about any thing else you can think of to treat or prevent health problems. The second bit of good news we have to share is that you don't have to "use it or lose it" by Dec. 31. Under new legislation and IRS guidelines, you now have until March 15, 2006 to use the money in your 2005 account. Any amount not spent by March 15 will be forfeited. We wonder how many thank you notes the IRS will get about this one. The Tax Talk column is written by Ken Milani, professor of accountancy at the University of Notre Dame, and Claude Renshaw, professor of business administration and economics at Saint Mary's College. It will appear periodically in the Tribune's Sunday Money section until April 15. Send your questions via e-mail to or , by fax to (574) 239-2646 or snail mail to The Tribune at 225 W. Colfax Ave., South Bend, 46626. Due to volume, questions cannot be answered personally, but Tax Talk will try to reply to as many as possible in the column.